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Could domestic tax authorities challenge the use of FINC?

Multinationals have an intrinsic need for regulatory compliance and use numerous mechanisms to achieve this, including the financial interest cover (FINC) clause.
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Multinationals have an intrinsic need for regulatory compliance and use numerous mechanisms to achieve this, including the financial interest cover (FINC) clause. However, while this clause was initially developed to mitigate regulatory challenges, it could soon be challenged by tax authorities and regulators, according to Marsh’s Insurance Regulatory & Tax Consulting Practice Global Leader, Praveen Sharma. Inconsistent wording and interpretation of various domestic insurance laws by global insurers could cause problems for multinational companies and, potentially, result in tax authorities treating FINC as “a tax avoidance mechanism,” Sharma said, at Axco’s ‘Global Insurance Conference, 2024’ in London, on 16 April.

Sharma mediated a debate entitled ‘The limitations of the FINC clause outweigh its benefits. The industry should use it more conservatively.’ The session was an engaging discussion between industry experts on the correct use of the FINC clause by multinationals across the world.

The development of FINC

The FINC clause was designed to protect multinational groups and their subsidiaries from potential regulatory challenges where the law specifically prohibits a local entity from buying insurance from a foreign insurer.

The FINC clause was developed out of a necessity for greater regulatory compliance, as multinationals desired consistent, worldwide coverage for all group entities – while retaining centralised control. Additionally, they also wanted reliable protection against complex, unique insurance and tax regulations – with gap coverage – at low costs and with minimal time spent developing it. However, since its inception in 2006, many multinationals and insurers have, over time, used the FINC clause in multiple ways due to various, differing interpretations.

A model FINC clause

The FINC clause “should cater for unforeseeable local situations,” said Sharma. From an insured’s perspective, FINC should only be applied as a matter of last resort for non-compulsory classes of risks located in areas where non-admitted insurance is strictly prohibited by law. However, incorrect usage and different wording or interpretation from market participants has created confusion and could cause many problems for multinational companies. According to Sharma, “every insurer has their own wordings” for the FINC clause and they also tend to apply FINC inconsistently. It would, therefore, be beneficial for market participants to formulate a more uniform, industry-wide stance.

To rectify the confusion around the use of FINC, the International Underwriting Association (IUA) created a model clause to give clarity and consistency. Published by IUA in April 2022, Sharma worked with insurers and legal experts to help dispel the ambiguity surrounding FINC. Widespread adoption of the IUA model would reduce “inconsistent use of wording from insurers,” said Sharma.

The FINC clause: An option of last resort?

The FINC clause is widely accepted as an option for multinationals seeking regulatory protection for themselves and their subsidiaries. However, carriers and brokers alike, can be tempted to freely use the FINC clause in inappropriate scenarios, such as ground up cover. If applied incorrectly, multinational organizations can suffer adverse premium and/or corporate income tax issues. Furthermore, there is also the potential for organizations to suffer double taxation.

The penalties for incorrect use to companies can be significant. “I wouldn’t advise primarily to use FINC,” said Sharma. Multinational companies would be better suited correctly structuring their programs with deep analysis and planning, ahead of time.

Further FINC risks

For multinationals, contract certainty is a big issue, Sharma said. There is “big uncertainty surrounding where claims will be paid,” and currently, “there is no scenario testing for where this will happen – particularly under the master and excess policies,” said Sharma. The uncertainty faced by organizations should be addressed during the renewal strategy phase to help quantify and reduce risks. This is an important step for multinationals looking to build resilience in their operations for each country they operate in.

Additionally, the market needs to recognise that there are certain forms of insurance that are unsuitable for use of the FINC clause. For issues surrounding the acts of ‘natural persons’, multinationals would not want to “count on the use of FINC,” said Sharma. Policies such as directors and officers or side A insurance, are key examples of this.

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